How Crime Affects Mexico’s Housing Prices

A new study by the Inter-American Development Bank finds that violence disproportionately affects the real estate value of homes in poor neighborhoods in Mexico, an illustration of how crime exacerbates wealth inequality.

Crime is costly. It costs us directly, by greater public and private investments in security such as police, alarm systems, health care and prison costs, among others. It also costs us indirectly, as a result of the changes in behavior we make out of fear. In a variety of ways, crime impacts the well-being of society. But how can we measure this impact?

This article originally appeared on the Inter-American Development Bank’s blog Sin Miedos and has been translated, edited for clarity, and reprinted with permission. See Spanish original article here.

One of the ways to measures change in well-being is by examining how the willingness of people to pay for goods and services changes. It is believed that people are less disposed to pay for properties located in violent areas, thereby lowering the social well-being of the residents in those areas. We decided to test this hypothesis using housing prices.

To do this, we used the hedonic pricing method, which estimates the economic benefits and costs of both internal and external factors affecting the overall value of an asset. In the case of properties, this would include security services, in addition to square meters. For our study, we examined the price — in addition to other characteristics — of more than 1.3 million apartment and house appraisals registered by Mexico’s Federal Mortgage Society between 2008 and 2011, which includes information on the geographical location of the dwellings.

We also collected information on homicides from the National System of Information on Health, which registers the cause of death, the date and the place it took place. Taken together, we were able to evaluate how violence affects the value of residential housing.

We detected that a 100 percent increase in the homicide rate resulted in a price drop for low-income housing of between 0.9 percent and 1.2 percent, while the price in residential areas with higher standards of living was not affected. Extrapolating this data onto the national level, and considering that between 2006 and 2011 the homicide rate rose over 200 percent, these results indicate that during this period, the housing prices for the poorest families fell 2.5 percent as a result of violence. Further cross-sectional analysis found that the rise in the homicide rate has a 64 to 81 percent greater impact on the housing prices of poor families compared to non-poor families.

The study also found that, although both poor and non-poor tend to change residencies more often in areas with high homicide rates, poor families do so at a 50 percent higher rate.

Additionally, in poor areas where violence has been more persistent — that is, that experienced at least a 150 percent increase in homicides between 2008 and 2011, with incremental growth during this period — the reduction in housing prices was 40 percent greater than in poor sectors that experienced short peaks of violence.

In sum, violence has had a greater effect on families with fewer resources, reducing the value of one of their most important assets: housing. Given this, then, hoping to encounter a place where they fell safer, the rise in homicides related to Mexico’s drug violence has intensified migration patterns of people from poor areas because they lack the means for higher cost housing with greater protections.

This study makes clear that the intangible costs of crime can exacerbate inequality and widens the poverty gap.

*This article originally appeared on the Inter-American Development Bank’s blog Sin Miedos and has been translated, edited for clarity, and reprinted with permission. See original article here.

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